The Solar Industry Wants a Tax Credit Extension. Should It Get One?

Solar energy is more competitive than ever. But the industry is not quite ready to give up its favorite incentive.

Four years ago, the U.S. solar industry was in the midst of “jockeying” to attach an extension of the Investment Tax Credit — the industry’s “most important public policy” — to whatever legislation lawmakers deemed appropriate.

As the credit neared its phaseout and the Obama administration's Clean Power Plan awaited implementation, analysts warned of an “unprecedented boom” through 2016 before solar hit the skids and dropped into a pit of uncertainty through 2019.

For those in the industry today, the anxiety should feel familiar — if it ever went away. 

In mid-December 2015, Democrats finally settled on a high-stakes bargain: In exchange for a lift of the longstanding oil-export ban — opposed by environmentalists and the Obama White House — the wind and solar industries got five-year extensions of their tax credits. 

The deal was an especially sweet one for solar: Lawmakers extended the full ITC through 2019, while wind’s Production Tax Credit began phasing down more quickly. 

When the extension cleared Congress, the Solar Energy Industries Association said it made the U.S. “the world’s preeminent producer of clean and affordable energy” and would help reach climate goals set out in the Paris Agreement, which countries of the world had hashed out just a month prior. 

Fast-forward to 2019 and an ITC extension is still SEIA’s “number-one priority,” according to an interview Greentech Media conducted with CEO Abigail Ross Hopper in May.

Despite similarities with the past, the industry is in a markedly different environment than four years ago. The Trump administration has aggressively distanced the U.S. from the Paris climate pact and dumped the Clean Power Plan. Solar only accounts for about 2 percent of electricity nationwide.

At the beginning of the year, installed U.S. solar capacity stood at around 63 gigawatts, compared to 264 gigawatts of natural-gas combined-cycle plants, the country's largest source of generating capacity.

Today, the solar industry says its 2015 arguments for an extension — that an additional five years of the credit would offer a reprieve from an anticipated contraction, and allow solar to become “cost-competitive in every market,” as SunPower said — are as relevant now as ever. 

“Given that we don’t really have any other federal policy right now that’s...pushing for clean energy, this would be the time for Congress to consider extending it — at least for a few years,” Anne Hoskins, chief policy officer at residential solar leader Sunrun, told Greentech Media earlier this summer.

As 2019 has worn on, the solar industry’s appeal for an extension has grown louder. The arguments are gaining some traction, too. This spring, lawmakers introduced legislation extending the ITC. Others followed up with a letter of support this summer. Many Democratic presidential candidates have pitched renewables credits as part of larger climate policy packages.

But with annual solar installations already slated to handily beat yearly wind capacity additions by the early 2020s, and with solar closing in on levelized costs of electricity for natural gas, it bears asking: Is another extension really necessary? 

The case for an extension 

SEIA has taken the most aggressive stance in lobbying for an extension of the credit, once again assuming the mantle it took on in 2015. Its arguments this time echo many put forth four years ago — namely, that a credit offers certainty in a market that’s generally faced volatility (tariffs from the Trump administration, other trade negotiations and uncertain state policies, to name a few examples).  

The 2015 extension brought clarity for solar developers in a jobs-rich industry, according to SEIA. The organization argues that another would do the same.

“As with any industry, market certainty and smart policy are critical to business success and job security for workers,” said SEIA in a release honoring Labor Day this year.

Though SEIA speaks for much of the industry, with members ranging from big players like Sunrun to local and regional players such as Carolina Solar Energy, many solar companies are independently calling for an extension as well. Companies such as NextEra Energy, Vivint Solar and Sunrun expressed support for an extension on their latest earnings calls.  

Solar companies are connecting their advocacy to climate change too, as the topic gains traction in the 2020 Democratic primary and a growing number of U.S. residents show support for immediate action on the crisis. Fossil fuels industries still receive numerous subsidies and incentives.

Though concern about climate change remains divided along party lines, the solar industry argues that support for renewables is an obvious point of agreement on a climate solution at a time when Democrats and Republicans are aligned on very few. 

Continued support for solar could also provide an easier on-ramp to a Green New Deal and federally mandated 100 percent renewables or clean energy, policies now getting top-line billing in debates about the future of the United States. 

“Supporting this proven policy is the first clear victory that lawmakers can deliver to Americans on climate change,” said SEIA's Ross Hopper in a recent statement. “As we debate long-term solutions, now is not the time to abandon the single most successful policy on the books to deploy clean energy in the near term.”

Recent research from SEIA and Wood Mackenzie Power & Renewables suggests that an extension of the 30 percent credit out to 2030, which is longer than the extension currently under consideration in Congress, would bump their base-case solar forecast by about 81 gigawatts.

And the questions

Though the solar industry, environmentalists and many politicians have lined up to support an extension, there are some doubts about whether it’s necessary for solar to continue thriving.

By nearly all measures, the resource is doing smashingly. Research out this summer from WoodMac indicates that solar will out-compete that of natural gas around the world by the early 2020s on a levelized cost of energy (LCOE) basis. 

In the U.S., solar is already encroaching on wind in certain markets, with traditional wind-heavy players such as NextEra Energy and Pattern Energy increasingly turning to the sun. Analysts say an extension of the credit could give solar a big advantage over wind. 

“Any federal incentive provided to either technology is going to provide that technology an edge,” said Dan Shreve, WoodMac’s head of wind research. “Solar is already an existential threat to wind power’s gross demand levels here in the United States.” 

Many in the clean energy industry have pushed back against framing the two technologies as competitors, arguing that the two are more complementary. Solar provides power when wind cannot and vice versa.

But the two resources are getting closer on cost, and in states like Kansas and Iowa, where wind turbines dot the landscape today, solar may soon be cheaper. At the same time, though, wind could get a boost in states that have higher solar saturation, like California, because it can produce at different times of day. 

“Looking purely at the prices tells only part of the story,” said Tara Narayanan, a solar analyst at Bloomberg New Energy Finance. “Given the fact that solar and wind have pretty different generation profiles, it’s very unlikely that they’ll be competing hour-for-hour for the same prices. But on an LCOE basis, there are places where solar is quite obviously the cheaper resource.” 

Despite the possible threat, the wind industry seems prepared to accept the phase-down of its credit.

“The Production Tax Credit was very instrumental in bringing the United States wind industry to a level of maturity where utility-scale wind power is able to produce very low-cost electricity and you’re able to produce electricity reliably,” said Shreve. “[But] the utility of the Production Tax Credit, in our eyes, has passed.” 

The industry’s main trade group, the American Wind Energy Association, has backed a “technology-neutral tax credit based on carbon emissions” rather than a wind-specific extension.

That would allow more technologies, like storage, to take advantage of incentives, which Narayanan acknowledges have “a slightly distorting effect” on how markets function, even as they’ve done the “instrumental” job of drawing down prices.

Others have joined in calling for incentives for more fledgling technologies like storage, which has also gotten legislative support. Earlier this month, Bill Gates suggested onshore wind and solar credits be shifted to earlier-stage technologies like energy storage and offshore wind.

Some argue the solar industry simply doesn’t need more help because it’s already shown such magnificent growth.

According to SEIA, the solar industry has grown at a rate of 52 percent annually since the tax credit was enacted. Overall, since 2006, solar has pulled in more than $140 billion in private investment and grown by a whopping 10,000 percent, a number that’s slightly less shocking when one considers the size of the solar industry at that time. According to WoodMac, the industry had only installed 1,168 megawatts prior to 2010, compared to the 12.6 gigawatts expected to be installed this year alone.

Between 2012 and 2018, single-axis utility-scale prices dropped from $2.48 per watt to $1.10 per watt (DC), WoodMac says. Residential solar experienced similar, albeit more modest, price declines, dropping from $4.77 per watt to $3.15 per watt. Even with a phaseout of the ITC, analysts forecast costs will continue to reduce, with single-axis systems reaching $0.77 per watt by the end of 2024.

Solar contracts now regularly hover just above $20 per megawatt-hour, with further declines on the horizon. “Costs are significantly falling over the next five years and [solar is] going to be competitive in nearly all markets. There’s really no doubt about that,” said Narayanan.

“Even if the ITC was to go away...we’re still going to see $20 prices, and essentially the cost reductions over time on capex, and every other part of the supply chain will continue to support lower LCOEs,” she added.

Another possible argument for allowing the credit to phase down: the agreement struck in 2015. As Narayanan puts it, the solar industry “knew this was coming.”

“We as an industry said, 'Get us out to 2020 and that’s good.' Now we’re out to 2020 going, ‘Well, it’d be great if you pushed that out even further,’” Tom Werner, SunPower’s CEO, acknowledged to Greentech Media this spring. “The contradiction is real.”

In 2015, SEIA pointed to research showing that “the ‘ITC cliff’ in 2017 under current policy is far steeper than the drop following the end of an extension in 2022.” In other words, the industry is better equipped to deal with a phaseout than it used to be.

Of course, the current policy landscape looks much different now than what many people imagined back in 2015. While the federal government has become much less friendly toward clean energy, numerous states have instituted 100 percent renewable or clean energy mandates. Climate change is getting more mainstream political attention these days, although little concrete political action has occurred as a result.

In any case, the path toward a possible extension would likely look similar to the eleventh-hour deal pushed through in 2015. A new president could also push for an ITC extension or modification after the 2020 election.

“We shouldn’t have to rely on a tax credit forever,” said SunPower’s Werner. “But it’s a fairly dramatic stepdown.”